Over two years ago, the Supreme Court in Universal Health Servs. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016) upheld the implied certification theory of liability under the federal False Claims Act (“FCA”). Applying a two-part test, the Court stated that implied liability would attach where “at least two conditions” are satisfied: (1) the claim makes specific representations about goods or services provided and (2) the defendant’s failure to disclose noncompliance with a material statutory, regulatory, or contractual requirement renders those representations “misleading half-truths.” Courts interpreting Escobar have disagreed as to whether this two-part test is the exclusive means for establishing liability under the implied certification theory, or whether other circumstances might also trigger liability. For example, several courts have noted that Escobar’s reference to “at least two conditions” implies that other, unspecified factors might also be sufficient to create an implied certification claim. The Fourth Circuit, along with several other district courts, have adopted this more liberal view. Most other circuits that have addressed this issue, however, have found the two-part test to be mandatory. The First, Third, Fifth, and Seventh Circuits, as well as many district courts, have either explicitly or implicitly held that Escobar’s two-part test is the exclusive means of establishing implied certification.

The Ninth Circuit in U.S. ex rel. Rose et al. v. Stephens Institute, No. 17-15111, 2018 WL 4038194 (9th Cir. Aug. 24, 2018) recently joined the majority of courts in mandating Escobar’s two-part test, although the court clearly expressed its reluctance in doing so. The case involved a university’s alleged violation of the incentive compensation ban (“ICB”) under Title IV of the Higher Education Act. The relators, who were former admissions representatives, alleged that the university violated the ICB by compensating recruiters based on their success in securing enrollments. At the district court, the university claimed that it did not make any misleading representations in requesting funding. The district court rejected this argument, holding that the university was “incorrect as a matter of law that Escobar established a rigid ‘two-part test’ for falsity that applies to every single implied certification claim.” In other words, the relators were not required to demonstrate evidence of a “specific representation.”

On appeal, the Ninth Circuit evaluated its precedent on implied certification in light of the Supreme Court’s holding. Before Escobar, the Ninth Circuit applied a more liberal standard under its decision in Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993 (9th Cir. 2010), which only required evidence that the defendant submitted a claim while it was noncompliant with an applicable law, rule, or regulation. Although the Ninth Circuit believed that Escobar did not necessarily overrule Ebeid, it acknowledged that its post-Escobar decisions consistently applied the two-part test. Accordingly, the Ninth Circuit held that it was bound by these prior opinions, requiring the relators to satisfy Escobar’s two conditions to prove falsity, “unless and until our court, en banc, interprets Escobar differently.” Notably, one of the judges during oral arguments strongly suggested that prior Ninth Circuit opinions have may “misrepresented” or “overshot what Escobar requires.”

The court’s decision makes clear that FCA defendants in the Ninth Circuit will not be subjected to lingering questions of implied liability—at least for now. Considering the Ninth Circuit’s reluctance in imposing this test and foreshadowing of potential en banc review, the possibility remains that a subsequent decision may find, as other courts have, that Escobar merely provided one avenue for establishing liability under the implied certification theory. If an en banc court chooses to depart from the Ninth Circuit’s holding in Stephens Institute, it will deepen the split between the courts on this issue, potentially prompting Supreme Court review.

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